Sports Direct profits plunge due to investments, 'elevation' gains traction

Sports Direct reported a 3.5% improvement in annual revenue to £3.36bn for the year to 29 April but a 72.5% plunge in profit before tax to £77.5m.

The FTSE 250 sportswear retailer said the decline in reported profits from £281.6m the year before was largely due to an £85.4m impact from the company’s strategic investment in embattled department store Debenhams, due to current-year fair value adjustments mitigated to some extent by investment income. It also blamed prior year investment income from the sale of JD Sports shares, and the disposal of the Dunlop brand.

Group gross margin decreased to 39.7% from 41.0%, which the board put down to acquisition accounting as a result of the acquisition of Bob's Stores and Eastern Mountain Sports, and increased inventory provisions.

But free cash flow before pre-capital expenditure, was strong, up to £326.2m from £257.4m in the prior year.

Underlying profit before tax rose 34.5% to £152.9m and underlying basic earnings per share increased 74.6% to 19.9p. These measures exclude currency swings, exceptional costs, and any profits or losses from the disposal of subsidiaries, strategic investments and properties.

Underlying sales excluding acquisitions, disposals, the 53rd week and currency swings, was up 0.7% as underlying UK sports retail revenues decreased 0.3%. Like-for-like stores gross contribution in UK sports retail was down 0.6%.

In European sports retail, revenue was off 0.1%, or by 3.2% on a currency-neutral basis, excluding acquisitions and the 53rd week. European sports retail like-for-like stores gross contribution was down 2.0%.

The company’s premium lifestyle retail, including chains such as Flannels, Cruise and Van Mildert, was the star performer, increasing 42.7% due to an increased store portfolio and online sales.

Net debt rose to £397.1m from £182.1m at 30 April 2017, due to the purchase of own shares, strategic investments and investment in property set against a strong free cash flow.

Sports Direct invested £140.0m in property assets during the year, up from £317.0m, as it executed its strategic priority to elevate its sports retail proposition.

Chief executive Mike Ashley said: “I'm pleased that our underlying EBITDA has come in at the top end of our expected range at £306.1m as we indicated this time last year, and also that the underlying profit after tax has increased substantially to £104.9m.”

Michael Murray, the company’s head of elevation, added that during the 2018 financial year, the company had seen growth in underlying EBITDA of 12.2%.

“The elevation strategy continues to exceed expectations,” he explained.

“As the property pipeline and brand relationships accelerate, we are confident in achieving between a 5% and 15% improvement in underlying EBITDA for the coming financial period.”

Broker Liberum said the 12.2% increase in EBITDA and adjusted PBT up 34.5% to £152.9m was "a strong outcome, some 23% ahead of our forecasts".

Peel Hunt analyst Jonathan Pritchard said that management's attempts to elevate product and raise store standards was clearly working, but it comes from a low base.

"Sports Direct is the naughty kid who used to be in detention every week and is now mending his ways: there’s a long way still to go to become the real teacher’s pet of the brands. Indeed, we believe that Sports Direct’s attempts at elevation have a ceiling.

"The product range and client base are completely different to JD, and that will continue: Sports Direct will serve its shoppers in an increasingly appropriate way, but we’d say that there is no chance of it reverting back to the toe-to-toe battles with JD: the offers have completely diverged.

"That doesn’t mean that Sports Direct can’t continue to prosper in its territory, but we think that the upside from an elevation perspective is capped."